International news

EU leaders gather as debt crisis simmers

Summit to produce agreement on bank tax: report

By

WilliamL. Watts

LONDON (MarketWatch) -- European Union leaders will gather Thursday at a summit billed as an opportunity to plan the region's economic future.

But they may have to deal with more immediate questions, economists said, including a continued rise in borrowing costs for southern euro-zone countries such as Spain despite the creation last month of a 750 billion euro EU-International Monetary Fund rescue plan and the European Central Bank's unprecedented bond-buying program.

The premium investors demand to hold 10-year Spanish government bonds over German bunds soared to their highest level since the debut of the euro in 1999, hitting around 2.23 percentage points amid news reports

"We have seen a big widening in bond spreads over the last 48 hours ... I don't know if the summit will comment on that but I think that's the overriding concern at the moment," said Kenneth Broux, market economist at Lloyds TSB. "The market is still worried about funding."

Spain has moved into the spotlight this week, with the government and the EU both denying numerous news reports that a rescue package for Madrid is in the works. A German official on Tuesday said Spain was unlikely to be on the summit agenda, Reuters reported.

The euro
EURUSD, -0.1465%
however, has stabilized, after falling to a four-year low around $1.19 versus the dollar earlier this month. The currency recently changed hands near $1.23.

The Brussels meeting of the heads of the EU's 27 member countries has been billed as an opportunity to address the need for tighter oversight of fiscal policies and to iron out a common European position on financial regulatory issues ahead of next week's Group of 20 meeting in Canada.

Leaders will endorse a European tax on banks that will be used to help fund future bailouts, the Associated Press reported, citing a draft text. The EU will urge the United States and other countries to introduce a bank fee at the G20 summit.

A task force headed by European Council President Herman Van Rompuy, consisting of finance ministers from the 16 euro-zone nations, is slated to present a report on calls for tighter fiscal governance, though no decisions are expected to be made.

German Chancellor Angela Merkel and French President Nicolas Sarkozy met in Berlin on Monday in an effort to iron out differences ahead of the G20 gathering. Tensions between Berlin and Paris were said to have been mounting amid disagreements over how to enforce fiscal rules and on Germany's calls for more aggressive deficit reduction across the region.

Sarkozy acknowledged Merkel's call for all 27 EU nations to play a role in overseeing economic governance of the euro zone, after previously insisting that moves to toughen fiscal oversight should be directed by a new, permanent secretariat and officials from the 16 euro-zone nations.

Merkel has also pushed for controversial measures that would penalize nations that run afoul of Europe's fiscal rules.

But calls for an EU "peer review" of national budgets have met resistance from British Prime Minister David Cameron, who will be attending his first EU summit since taking office in May.

Cameron is also expected to oppose the imposition of sanctions on countries that violate EU rules but are not members of the euro, the BBC reported.

Meanwhile, the emphasis on tougher enforcement of fiscal rules follows Europe's inability to ensure compliance with the stability and growth pact put in place to ensure fiscal convergence in the euro zone.

But disagreements over how to fashion tougher fiscal oversight of the region or on other issues could present a degree of headline risk for the one-day summit, analysts warned.

Throughout the crisis, "evidence of pan-euro-zone clashes and procrastination on matters integral to the stability of economic and monetary union has delivered the euro a savage blow," said Simon Derrick, chief currency strategist at Bank of New York Mellon, in a research note.

"As such, despite a prevailing atmosphere of reduced pessimism across markets right now, there are risks that further evidence of discord on might well have a none too dissimilar impact," he said.

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